When the COVID-19 crisis shook markets in March, the Federal Reserve moved early and aggressively to help increase liquidity in financial markets. As part of that effort, the Fed introduced bond-buying facilities to purchase investment-grade corporate bonds. Those facilities began making purchases on May 12th.
Given its unprecedented nature, this has led to many questions about the logistics of the facilities, what it means for the markets, and what it means for investors. Below are some of the most frequently asked questions:
What are the corporate bond-buying facilities?
The Fed announced two facilities on March 23rd:
- Primary Market Corporate Credit Facility (PMCCF)
- Secondary Market Corporate Credit Facility (SMCCF)
The PMCCF will purchase bonds in the primary market, meaning when the bonds are initially issued.
The SMCCF will purchase corporate bonds and corporate bond exchange-traded funds (ETFs) in the secondary market. The secondary market is where bonds are bought and sold after their initial issuance.
Both of these facilities will operate as special purpose vehicles (SPVs). The Federal Reserve itself is not able to purchase corporate bonds, so it will lend to the newly created SPVs, which will then buy bonds and lend to corporations.
Why did the Fed launch these facilities?
Beginning in early March, corporate bond spreads began to rise. A credit spread is the additional yield a corporate bond offers above the yield offered on a Treasury security with a comparable maturity. It’s meant to compensate for the extra risks investors take in owning corporate bonds, including the risk that the issuer may not be able to make debt payments.
When COVID-19 concerns really took hold in early and mid-March, many corporations were not able to issue new bonds in the primary market. Lenders were generally unwilling to lend to corporate borrowers, or the borrowing costs may have been prohibitive for some issuers. By launching these facilities, the Fed is helping support the corporate bond market, ultimately serving as a lender for eligible companies that need or want to issue debt.
The announcement of these corporate bond-buying facilities brought credit spreads down sharply, helping more corporations to issue new debt.